INSURANCE
Early years insurance: have you got it covered?
We look at the steps you can take to make sure your early years setting has the cover it needs
Sorting your early years insurance is often one of the last things you want to or have time to think about. We’ve all felt that dread when the renewal letter lands on the doorstep. But it’s important that you do it, and important that you do it right to safeguard your business.
We understand that buying insurance can be time consuming and it isn’t helped by all the jargon that comes with it.
This article aims to bust some of that jargon – with a focus on underinsurance. What is it? Why should you be bothered about it? And what are the consequences of being underinsured?
What is underinsurance?
Underinsurance is when the cover you select in pounds, also known as the sum insured, isn’t enough: it won’t cover the full cost of rebuilding your premises or replacing your equipment.
Underinsurance example
Sally had her building and its equipment insured for £400,000, but this was all destroyed by a fire.
The true cost of completely rebuilding the premises and replacing the equipment was £500,000.
As a result, Sally is underinsured by £100,000. As a percentage, Sally has a 20% shortfall or ‘underinsurance gap’.
As Sally has a shortfall of 20%, her insurer could reduce what they pay for all claims by this amount to reflect the underinsurance gap. In this case, Sally would only receive £320,000 to repair her property and replace its contents – meaning she would need to pay the £180,000 difference.
It is possible that her insurer may view a large shortfall in insurance cover as what is called ‘a misrepresentation of material facts’. If so, they may cancel the policy and refund the money paid. If this were to happen, there would be no active insurance policy and Sally would have no help to repair her property and replace her equipment.
How can you avoid under insurance? Tips to consider:
- Are you sure you have valued everything correctly? Pay particular attention to the building itself and everything inside it.
- Do not get rough estimates or rely upon outdated valuations. Ensure that you have up-to-date valuations and the amount you have entered on your proposal form reflects the true value.
- Consider if an increase in rebuild costs, inflation or both has increased the value of the building you insure. When calculating your premises’ value, use reinstatement costs, not market value. This is the total cost to rebuild or repair the premises from scratch, not how much the building is worth.
- What the building is worth can fluctuate and is unlikely to be the same value as the true rebuilding costs, especially as there has been a sharp increase in the cost of raw materials in the past few years.
- Thoroughly assess all your business’s potential risks. Don’t be tempted to automatically go for the basic cover, as it may not reflect the true amount at risk.
- When ‘business-as-usual’ trading is affected or interrupted, there will most likely be a financial impact. Therefore, consider a realistic time frame to get your business back up and running when calculating the amount of cover you need.
- Contents cover is usually based on ‘new for old’. Have the prices to buy equipment gone up in recent years? You need to keep that in mind when deciding how much to insure them for. It is important to look to insure for its current replacement value to avoid an ‘underinsurance gap’. You should regularly review this, as prices will change over time due to inflation.
Finally, if you have any questions about your insurance or want to know whether there are any gaps in your current protection, we can talk you through your options. You can contact the friendly Alliance insurance team on insurance@eyalliance.org.uk or call us on 020 7697 2595.